Reflections on the Origins of the NY Franchise Act

I recently had occasion to review the legislative history of the New York Franchise Sales Act (NYFSA)–click here to see for yourself. Here are a few of my reflections.

The NYFSA was enacted into law in 1980 and became effective January 1, 1981. At that time, Robert Abrams was the NY Attorney General and Hugh Carey was the Governor. Abrams supported the bill and Carey signed it into law.

In recommending passage of the bill, Attorney General Abrams cited the numerous complaints of franchise fraud and abuse that the department of law had received. More than 13,000 New Yorkers had been victimized by franchise fraud, with documented losses exceeding $38 million.

The Attorney General’s Office communications constitute the only supporting documentation in the legislative history. Others who expressed a position opposed enactment of the law. Opponents included the International Franchise Association, Pizza Hut, Days Inns, Sir Speedy and others.

Arthur Gunther, then President of Pizza Hut, urged Governor Carey to veto the legislation to avoid “bureaucratic overkill”. He wrote that the bill was totally unnecessary since the new FTC Rule had become effective just months earlier, on October 21, 1979.

Andrew Caffey, writing for the IFA, urged Governor Carey to veto the bill in order to give the new FTC Rule “a chance to eliminate the problems and abuses brought to light in legislative testimony by the Attorney General’s office.” He pointed out that the laws of twelve states required franchise registration, but that these state laws were passed long before the FTC Rule was promulgated. If the bill were to become law, he wrote, New York “would become the first state in three years to pass such a law, and the first state to require additional registration since the promulgation of the Rule in December of 1978.”

This in fact happened. As it turned out, New York was the last state to enact a franchise registration and disclosure law.

Before the NYFSA became law, the IFA and others pointed out several deficiencies of the legislation. For example:

Section 683(7)(d) provides that the department may refuse registration if it finds “that the franchisor’s method of business includes or would include activities which are illegal where performed.” The IFA wrote that this “would give the department effectively unfettered authority over virtually all legal aspects of a company’s business in the United States.”

Section 685(5)(c) requires franchisees to provide a copy of the franchisor’s currently registered offering prospectus to a prospective buyer of the business. No other franchise law required franchisees to disclose when they sell their business.

Section 689(4) allows a court to order the appointment of a Receiver “at any stage of the proceedings” in an action instituted by the department. The Receiver can seize control of the franchisor company and all of its property based solely upon allegations of violations of the law on the part of the company.

All of these issues remain valid today, although these provisions have received little or no attention from those of us who have sought to revise and update the NYFSA in recent years.

Other objections the IFA and others raised have since proved to be less serious. For example, Section 683(6) authorizes the department of law to “require that an applicant set forth in its disclosure document potential adverse information in designated positions and in a type size acceptable to the department.” Other registration states have similar requirements, and franchisors include these disclosures as “risk factors” following the cover pages of the FDD.

Section 683(9) requires franchisors to promptly notify the department of any material change. Although the words “promptly” and “material” are not defined, this type of requirement is not unusual in other registration states.

Interestingly, those who objected to the legislation in 1980 wrote nothing about the issues that I and others regard as the most serious ones with the legislation. First among these is the broad scope of the definition of a franchise in Section 681(3). The definition is so broad that it covers a wide range of businesses that no person in ordinary discourse would ever call a franchise and that no other state or federal law regulates as a franchise. Nor did anyone envision in 1980 that the New York law might be applicable to international transactions. And of course the FTC Rule has since been rewritten, preempting large portions of the New York law and creating a need for revisions in the NYFSA to align it more closely with federal law and the laws of other registration states. I wrote about these and other problems with the New York franchise law in an earlier blog post.

Today, franchising fraud has been substantially eliminated and franchising has become an important and mainstream component of the U.S. economy. The federal and state laws, including the NYSFA, have had the beneficial effect of cleaning up this business sector. It is good that the NYSFA gives the New York State Attorney General’s Office the power to prosecute fraud in franchise sales and that it gives aggrieved franchisees a private right of action for franchise sales fraud. These are the two most important consequences of the enactment of the NYSFA, and they are both positive. But much can be done to improve the law.

Share this:

About: Tom Pitegoff

Tom Pitegoff is co-chair of the LeClairRyan franchise industry team. He is an internationally recognized leader in the franchise field. He drafts franchise agreements and disclosure documents, obtains state franchise registrations and provides ongoing franchise compliance counseling services. He represents foreign franchisors in their U.S. business and U.S. franchisors expanding abroad. View all posts by Tom Pitegoff →